Mortgage Market Still Hampers Housing Recovery

WASHINGTON - The Realtors say it, the home builders say it, and now the chairman of the Federal Reserve is saying it: "Some creditworthy borrowers are still having trouble getting a mortgage."

Loose mortgage underwriting is largely blamed for the housing crash, and as a result the credit markets have swung in the opposite direction, some say too far.

"You'll see fewer willing lenders at 660 than you do at the top end of the scale," notes Bankrate.com's Greg McBride, referring to FICO scores (Fair Isaac Corporation).

Twenty five percent of Americans today have a FICO credit score lower than 650, and twelve percent more are below 700. While the Federal Housing Administration (FHA), the government's mortgage insurer, is supposed to be serving borrowers with lower credit scores, the average FICO for an FHA loan in March was 701.

"It's often the lender regarding the higher score," says Rick Sharga of Carrington Mortgage Holdings. Despite the FHA insurance, lenders just won't take the chance.

Many borrowers who lost big during the housing crash are now fighting to regain their credit, but the time it takes to do that depends largely on how high their credit score was to begin with. According to FIC, a borrower with a credit score above 780 who lost a home to foreclosure will need 7 years of unblemished credit to regain their standing. A borrower who started at 680 will need just three years. Just being late on mortgage payments, up to ninety days, will drop your credit score 80 points if you started at 680 but 130 points if you were at 780. The higher you start, the harder you fall.

And it is not just credit standing in the way of a home loan. In order to get today's record low interest rates, you need to put 20 percent down on the home. For a $300,000 home, that's $60,000. On top of that you often have a 6 percent brokers fee and then closing costs, which averaged just over $4000 last year, according to Bankrate.com. If you do have lower credit, or a lower down payment, you will have to pay private mortgage insurance.

If you don't have much money to put down, and you do have lower credit, the FHA is your only option now, but fees and premiums are going up there as well. 27 percent of home purchase financing in March of this year came from FHA loans, according to Campbell/Inside Mortgage Finance, but that was just before fees went up. The FHA share of mortgage originations has been dropping precipitously since then.

As the housing market recovers, and home prices stabilize, one might assume the credit markets would loosen as well. That has not been the case so far, according to a recent Federal Reserve survey of bankers. In fact, mortgages will likely get more expensive, as federal regulators move closer to new rules concerning risk retention in mortgage lending.

In addition to fees, credit and down payment, just less than a quarter of homeowners with a mortgage owe more on that loan than their home is currently worth. These so-called "underwater" borrowers are therefore trapped, unless they have enough cash to put out and are willing to eat their losses. There are also many more who are in a near-negative equity position, which means they do not have enough equity in their homes to cover a new down payment, closing costs and brokers fees. That knocks a lot of potential buyers out of today's market.

There is no question that we must not return to the lax lending of the past, where borrowers were asked no questions and offered whatever they wished. There is a question of how tight the mortgage market needs to be, when housing is still the chief impediment to overall economic recovery.